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Can Best Buy Combat 'Showrooming'?

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Best Buy Co., Inc. (BBY - Analyst Report), which is slated to report its fourth-quarter results on February 28, has had a tough year. The retailer had a disappointing third quarter. Earnings per share dropped from the year-ago quarter figure of 47 cents to just 3 cents, a decline of nearly 94%.

Total revenue and same store sales declined by 3.5% and 4.3%, respectively. Moreover, comparable-store sales declined 4% due to sales declines in gaming, notebooks, digital imaging and televisions.

But the tide seems to have turned in recent months. The holiday season has been better than expected for Best Buy. Shoppers have purchased higher numbers of flat screen televisions and other major appliances. These developments have provided optimism to investors, boosting the share price from $12.20 on Dec 12, 2012 to $17.41 at the closing of markets on February 21, 2013.

The major challenge which Best Buy faces along with traditional retailers like Target Corp. (TGT - Analyst Report) and smaller players like RadioShack Corp. is from online retailers like Amazon.com Inc. (AMZN - Analyst Report). The threat of online retail is even more relevant because of a practice which has come to be called “showrooming”. This refers to a phenomenon where customers examine merchandise in person at a physical store before purchasing it online at a better price.

However, a different kind of showrooming is emerging where customers visit stores armed with their smartphones. In this case, the loss of sales could be even more harmful.

Many retailers, such as Target, have chosen to combat this by launching shopping apps which drive traffic to their own websites. Others like Toys R Us have launched exclusive products. The logic here is that if a product is available exclusively from that retailer, the consumer can no longer opt to purchase it at a cheaper price online.

Best Buy is attempting to fight showrooming by adopting a price matching strategy. Starting Match 3, it will match prices for “all local retail competitors and 19 major online competitors in all product categories and on nearly all in-stock products, whenever asked by a customer.” Of course, this offer is restricted to a single item and there are other exclusions, but it’s the first concrete effort to combat the phenomenon.

Target has already made its price matching policy permanent and stopped selling Amazon’s Kindle. This is a clear signal that it will no longer stock products from a company that was aggressively eating away at its sales. Clearly, traditional retailers cannot afford to give up market share to online competition and are even aggressively trying to grab back lost customers.

The bigger threat is possibly from the likes of Google Inc. which is expected to open its own retail outlets and Microsoft Corporation (MSFT - Analyst Report) which has already done so. Following in the footsteps of Apple Inc. (AAPL - Analyst Report), Google and Microsoft are also attempting to control every aspect of the consumer experience.

One unique proposition which Best Buy had offered to customers was its Geek Squad which provided assistance to consumers who had trouble figuring out modern day gadgets. Even so, it was considered to be below par compared to Apple’s Genius Bar. If Microsoft and Google both set up stores with similar specialist employees, the Geek Squad could begin to lose its novelty altogether.

However, all is not lost for Best Buy. Its recent success and a concurrent appreciation in share price have shored up its fortunes. The company has even seen its ratings improved by some brokers. Clearly, better days may be ahead for Best Buy.

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